Key Takeaways
- IRC §7525 extends attorney-client privilege to Federally Authorized Tax Practitioners (FATPs).
- Applies to non-criminal tax matters before the IRS and federal courts.
- Does NOT apply to criminal tax matters.
- Does NOT apply to tax shelter advice.
- Does NOT apply to return preparation itself.
- Privilege belongs to the client and can be waived by the client.
Client Confidentiality & Privilege (IRC §7525)
Why This Matters for the Exam
IRC §7525 is tested because it defines when communications between a client and a non-attorney practitioner are privileged. The exam frequently tests the exceptions—when the privilege does NOT apply.
Expect at least 2-3 questions on §7525 scope and exceptions.
What Is the §7525 Privilege?
IRC §7525 extends a privilege similar to attorney-client privilege to communications between a taxpayer and a Federally Authorized Tax Practitioner (FATP).
FATPs Include:
- Enrolled Agents (EAs)
- Certified Public Accountants (CPAs)
- Attorneys (already have attorney-client privilege)
- Enrolled Actuaries (limited)
Scope of the Privilege
The privilege applies to tax advice given in connection with:
| Protected | Forum |
|---|---|
| Tax advice in non-criminal matters | Before the IRS |
| Tax advice in non-criminal matters | In federal court (non-criminal) |
Exceptions: When the Privilege Does NOT Apply
| Exception | Explanation |
|---|---|
| Criminal matters | Privilege does not apply in criminal tax investigations or prosecutions |
| Tax shelters | Advice related to promoting or participating in tax shelters |
| Written advice re: tax shelters | Specific carve-out for tax shelter communications |
| Return preparation | Preparation of the return itself is not "tax advice"—it's disclosure |
| State proceedings | §7525 applies only to federal matters |
Exam Trap: The privilege does NOT protect return preparation. The return is filed with the IRS—it's meant to be disclosed, not kept confidential.
Who Holds the Privilege?
The client holds the privilege, not the practitioner. This means:
- The client can waive the privilege (voluntarily disclose).
- The practitioner cannot waive without client consent.
- If the client waives, the practitioner must disclose.
Comparison: §7525 vs. Attorney-Client Privilege
| Factor | IRC §7525 (EAs/CPAs) | Attorney-Client |
|---|---|---|
| Applies to | Tax advice only | All legal advice |
| Criminal matters | Not protected | Protected |
| Tax shelters | Not protected | Protected |
| State courts | Not protected | Protected |
| Federal civil tax | Protected | Protected |
Key Point: §7525 is narrower than attorney-client privilege. Attorneys have broader protection.
Real-World Scenario
Scenario: You're an EA advising a client on whether to claim a questionable deduction. The IRS later audits the client and subpoenas your communications.
- Is the communication privileged? Yes, if:
- It was tax advice (not return preparation).
- The matter is non-criminal.
- It's not related to a tax shelter.
- If the client is under criminal investigation: No—the privilege does not apply in criminal matters.
On the Exam
Expect 2-3 questions on §7525, typically:
- Scope Questions: "When does the §7525 privilege apply?"
- Exception Questions: "Does §7525 apply to criminal tax matters?"
- Tax Shelter Questions: "Is advice on tax shelters protected by §7525?"
- Ownership Questions: "Who holds the §7525 privilege?"
The key is to remember: Tax advice, non-criminal, not tax shelters, not return prep. Client holds the privilege.
Does the §7525 practitioner privilege apply in criminal tax matters?
Which type of communication is NOT protected by the §7525 privilege?
Who holds the §7525 confidentiality privilege?